Four reasons why Canada’s Budget will impact Ontario

March 24, 2016

More daylight and the excited chirping of birds are not the only signs of changing seasons. Budget announcements and partisan squabbles are other clues. Here are four seasons – err, reasons – why Canada’s 2016 Budget will impact Ontario.

Winter hibernation

S​everal policy initiatives in Canada’s 2016 Budget should be put to rest. A prime example is the deficit, estimated at $5.4 billion for 2015-16. Deficit figures will not be frozen in time and are expected to rise to $29.4 billion in 2016-17 and $29.0 billion in 2017-18. A $24 billion increase in the deficit is an icy reality to the Liberal Party’s campaign of “moderate” deficits to a maximum of $10 billion a year for three years.

A different fiscal forecast is, in part, responsible. But we shouldn’t go down a slippery slope since government revenue as a proportion of GDP is expected to remain relatively flat. Personal income tax is projected to grow, but this mirrors inflation and assumes away a behavioural response. Increased spending – especially on climate change, infrastructure, and households – is also responsible for the growing deficit. Greater federal spending aligns with Ontario’s policy priorities, but increasing the national deficit can hurt future federal-provincial relations.

Another policy that should be put to rest is the Small Business Deduction (SBD), which lowers the corporate tax rate on firms’ first $500,000 pre-tax annual earnings. The SBD incentivizes firms to stay small or not report earnings greater than $500,000. Modifying the SBD by a gradual phase out or lowering the corporate tax rate for all firms are alternative approaches.

Climate change is one such problem, and Canada’s blossoming with energy to shift to a low-carbon economy. Over five years, $3.4 billion will be directed toward reducing air pollution, protecting ecologically sensitive areas, and restoring public trust in environmental assessments. Budget 2016 also establishes a $2 billion Low Carbon Economy Fund. Starting in 2017-18, $1 billion will be provided to support innovation and clean technology in forestry, fisheries, mining, energy, and agriculture. This approach is a breath of fresh air.

Strengthening innovation networks and clusters – projected at $800 million over four years – is integral to the addressing the wicked policy problem of low productivity. We support the government’s plans to help firms scale up and connect them to new trading partners. We are particularly excited about the introduction of the Canadian Cluster Mapping portal to attract foreign investment to clusters that are poised to grow.

Canada’s efforts to renew its (fiscal) relationship with Indigenous peoples should also stay on our radar. For five years beginning in 2016-17, $8.4 billion will be invested in improving education, drinking water, housing, and child and family services.

Summer time lovin’

We love some policies in Budget 2016. But it’s too early to roll down the window, put our feet on the dashboard, and cruise. The creation of an Innovation Agenda is a great example. Supporting creative and entrepreneurial citizens, advancing science and technology, investing in innovation infrastructure, and fostering a growing business environment, can help Ontario reduce its prosperity gap – estimated at $12,015 in GDP per capita. However, any initiative should be evidence-based.

We often joke that Canada is a country of two seasons: winter and construction. But construction helps connect businesses and Ontarians. Budget 2016 promises $120 billion over 10 years for transit, social, and green infrastructure projects. Phase one will focus on projects that have a short-term economic impact like transit, water and wastewater systems, and affordable housing; phase two is for projects that generate long-term growth. We support these long-term investments – especially health care and social assistance buildings as well as engineering related to marine, waterworks, and communications – because they have greater effects on labour productivity compared to short-term projects.

Falling out of old habits

Budget 2016 drops some policies that benefit high-income families so that public resources can fall on low income households. Ontario has worked hard to reduce child poverty rates in recent years, and the federal government’s consolidation of three child tax measures into the new Canada Child Benefit – designed to lift 300,000 children above the poverty line – is complementary. The Benefit eliminates the Children’s Fitness and Arts Tax Credits and Income Splitting for couples with children under the age of 18, increasing the amount families receive and reducing the administrative burden of multiple programs.

The Budget also turns a new leaf on policies for households and youth. By eliminating the Education and Textbook Tax Credits, the government is enhancing financial assistance under Canada’s Student Grants. To subsidize student employment, the Summer Jobs program is expanding by $113 million, and the Budget allocates $48 million for co-op placements in science, technology, engineering, and math. No two leaves look alike…but there is likely to be antagonism if they branch from different levels of government. There is some overlap in proposed federal and existing provincial initiatives. Ontario’s Centre for Workforce Innovation, which researches employment and training services, should work to streamline policy supports.

Weather the storm?

Some initiatives in Budget 2016, like the massive national debt and the SBD, should be put to rest. Other announcements – including support for climate change action, clusters, and Indigenous peoples – are a breath of fresh air. The creation of an Innovation Agenda and infrastructure investments are sound options that should be based on evidence. And efforts to support Canadian households and young people should promote intergovernmental collaboration.